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January 25, 2007
Buy Cotton
I have been recommending Cotton forever...and I am sick of this idea but I am NOT about to give up on it here. Futures ARE inherently volatile and Cotton is no exception. As this market is now far into the longest consolidation it has had in at least the past 30 years, recent developments lead me to believe the odds for a big bull move have gone sky high for 2007.
I can tell you that:
1. Exports have been dismal to start the year (bearish).
2.The USDA just raised its estimates for the recently harvested US and Chinese crops (bearish).
3. The USDA just raised its estimates for world cotton supply and ending stocks for this season (bearish).
4. The USDA just lowered its estimates for US exports and Chinese imports (bearish).
In other words, there is no immediate statistical reason to buy Cotton....Which is part of why I am doing so (AGAIN).  In this business, you buy markets (especially if they are a true world staple) when there is no reason to do so...
I can also tell you:
1. World demand for cotton basically moves higher each year simply as a function of population growth and the expanding global economy. In fact, world cotton consumption has increased 23% just in the past three years...
2. World production generally has to keep increasing to meet that demand. When it doesn't is when you get bull markets.
3. Corn, Wheat and Soybeans have all rallied dramatically during the past year (Corn and Wheat to 10 year highs), and with Cotton prices still in the cellar, I have little doubt Cotton will "lose" acreage worldwide to these crops in the coming year.
As a result, I cannot imagine Cotton doing anything but going up significantly in the coming year...ESPECIALLY after it has been just laying here at the low end of its historical price range for a full THREE years.
Here is a graph that kind of explains the basics of the Cotton market as I see it going forward...
The next chart should help make clear why one might expect world Cotton acreage to decline...With Corn only higher than this once in history, and Cotton at lower levels than 95% of the past 30 years, doesn't it make sense to expect a significant percentage of acreage, worldwide, to be switching out of cotton?
And Wheat, by the way, looks virtually identical to Corn...
Again, throw into the mix that Cotton has been consolidating for 3 years (longer than anywhere on this chart) and I can't help but see this as a hell of a bet...This IS a market that is typically a big mover....Especially a this time of year...
On the table below are the total ranges for every July Cotton contract, for the past 30 years, between January 31st (now) and the expiration of the contract in July...By total range, I refer to how much of a swing there is between the lowest trade and the highest trade of July Cotton...Note that in the past 30 years, there is only one year in which the range was less than 10 cents.

        Total Range July Cotton in Cents Per Pound - January 31st to Expiration
                      1 cent move = $500 per futures contract 

Year 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997
Total Range (high to low) 14.40 12.31 31.30 11.26 33.60 14.90 15.30 22.05 20.95 8.65


Year 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Total Range (high to low) 21.10 43.45 23.75 12.77 12.70 25.72 27.84 16.14 13.85 32.49


Year 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977
Total Range (high to low) 13.65 12.90 13.25 15.36 10.35 19.20 22.87 16.30 10.68 23.30
The bottom line is 30 years of data say this contract should go DECIDEDLY one way or the other...I may be dead wrong, but with world demand expanding when at the same time US and World acreage are almost certain to contract, I don't see how prices could possibly be headed lower...
Here is the current July contract I am positioning in....

Buy Low?
I think the 33 year chart of Cotton shown below really says it all...You can easily see how definitively volatile this market usually is...and how definitively sideways it has been going back to 2004...And how low it is relative to the past three decades. This chart really is the perspective that fires me up about this trade...
50 cent rallies do not happen overnight (they can easily take a year or two) but the point I am trying to make on the chart following is, when cotton does go up, it tends to do so in almost vertical fashion...and in a big way...
If you have already been in this trade with me, and have spent months watching options go to zero as Cotton went nowhere, you will hate this idea...But the fact remains, as commodity trades go, if you were walking up to the table for the first time with a fresh "wad", this IS a smart position to be taking. Cotton is, in my opinion, absolutely the most undervalued commodity on the board (especially in today's world), and, as evidenced by the chart above, it IS a market that does make some VERY big moves...And the next six months have repeatedly been a time of the year when it does so...This may be a total loser, but if it's not...if Cotton is coming out of this giant consolidation on the upside, I can't help but think the return has the potential to be a big multiple.
Is now the time to be on it?...Who the hell knows?...If I did, I wouldn't have been sitting on it for the past 18 months...In the end, this stuff is unpredictable and all you can do really do is make educated guesses, put your money on the table, cross your fingers and see what happens...
Give me a call if you want to know more...Other markets follow sometime soon...
Bill Rhyne
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